Transcript Slide 1

Investing For Your
Best Years:
Retirement
Module Objectives
After completing this module you should be able to:
• Understand how to define retirement goals
• Understand how to reach your retirement financial goals
• Understand what is life expectancy and how it will impact your retirement
financial goals
• Recognize how much Social Security might contribute to your retirement
income
• Recognize the various employer pension and retirement options available
• Recognize retirement savings plans for the self-employed
• Understand how individual retirement accounts (IRA) works
Reality Check
It is probably the case that
you can no longer only
depend on Social Security
income alone. Other
forms of income will be
necessary to cover your
future financial needs.
Retirement Financial Planning: How
Much Income Should I Project for my
Retirement Years?
A conservative rule of thumb is to set your goals as
on needing at least 80% of your current income
when you retire. But you need to consider the
following:
• How many years will you live after you retire?
• What will my expenses be when I retire?
• How much can I expect to receive from Social
Security?
• How much do I have in my company or
government retirement account and what will it
be worth when I decide to retire?
How many years will you live
after you retire?
Your life expectancy is
influenced by a number of
factors, from your family
history to your personal
lifestyle. As a rule of thumb,
plan for living 100 years and
receiving retirement income
throughout this period.
What will my expenses be
when I retire?
Answering this question along with
your life expectancy will help you
define your retirement financial goal.
This is where you will need to project
what your lifestyle will be and what
your wants and needs might be once
you retire. You will need to develop a
retirement budget to help you project
what your expenses might be.
Social Security
How Much Should I Expect to
Receive From Social Security?
• While you shouldn’t rely on social
security alone for your retirement
income, it can supplement your
savings, pension, and retirement
plan income.
• To estimate your Social Security
benefits please visit the SSA
Social Security Quick Calculator
Pros and Cons of Retiring
Before Full Retirement Age
There are advantages and
disadvantages to taking your
benefit before your full
retirement age. The advantage is
that you collect benefits for a
longer period of time. The
disadvantage is your benefit is
permanently reduced. Each
person's situation is different,
Employer Sponsored Pension
and Retirement Plans
Pensions (two types)
– Defined Benefit: determined by a
formula that can incorporate the
employee's pay, years of employment,
age at retirement, and other factors.
– Defined Contribution: contributions
are paid into an individual account for
each employee, the contributions are
invested and the returns on the
investment are credited to the
individual's account (i.e. 401(k), 403b)
What are 401(k) Plans
• The 401(k) plan is a type of a private
employer-sponsored retirement plan.
• A 401(k) plan allows a worker to save
for retirement while deferring income
taxes on the saved money and
earnings until withdrawal.
• the employee can generally select
from a number of investment options
(mutual funds that emphasize stocks,
bonds, or money market
investments).
401 (k) Plans
• 401 (k) Contribution Limits
– There is a maximum limit on the total yearly employee pre-tax salary
deferral. The limit is $15,500 for the year 2007. For future years, the
limit will be indexed for inflation, increasing in increments of $500.
• What Could Happen to my 401(k) If I Change Jobs?
– You have three choices regarding 401(k) money:
• Leave it in the plan.
• Take it out and keep it all.
• Move it to an IRA (roll over).
– Examine the roll over pros and cons table in your manual.
403(b) Plans
• A 403(b) plan is a tax
advantaged retirement
savings plan available for
public
education.organizations,
some non-profit
employers.
• It has tax treatment
extremely similar to a
401(k) plan.
457 Plans
• The 457 plan is a type of tax advantaged defined
contribution retirement plan that is available for
governmental and certain non-governmental
employers in the United States.
• The employer provides the plan and the employee
defers compensation into it on a pre-tax basis. For
the most part the plan operates similarly to a 401(k)
or 403(b).
Simplified Employee Pension
Plans (SEP)
• Simplified Employee Pension plans (SEPs) can
provide a significant source of income at retirement
by allowing employers to set aside money in
retirement accounts for themselves and their
employees.
• Under a SEP, an employer contributes directly to
traditional individual retirement accounts (SEPIRAs) for all employees (including the employer).
Retirement Savings Plan Options for
the Self-Employed (Keogh Plans)
• A self employed person can establish and make tax
deductible contributions to a Keogh Plan even if the person
additionally works as an employee and is covered by that
employers tax qualified retirement plan.
• You can also establish an IRA under the same tax rules as
other taxpayers.
• The maximum tax deductible contribution to a defined
contribution plan is the lesser of $44,000 or 100% of
compensation.
Individual Retirement Accounts
(IRA)
An IRA is a personal
savings plan that provides
income tax advantages to
individuals saving money
for retirement purposes.
Types of IRAs
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Roth IRA - contributions are made with after-tax assets, all transactions within the IRA
have no tax impact, and withdrawals are usually tax-free.
Traditional IRA - contributions are often tax-deductible (often simplified as "money is
deposited before tax" all transactions and earnings within the IRA have no tax impact,
and withdrawals at retirement are taxed as income
SEP IRA - employer (typically a small business or self-employed individual) to make
retirement plan contributions into a Traditional IRA established in the employee‘s
name.
SIMPLE IRA - a simplified employee pension plan that allows both employer and
employee contributions, similar to a 401(k) plan, but with lower contribution limits .
Self-Directed IRA – allows the account holder to make investments on behalf of the
retirement plan.
How Retirement Accounts Help You
Save On Taxes?
One potential way to save more:
maximize tax-advantaged savings
accounts such as Traditional IRAs and
401(k)s. (Subject to retirement plan
participation status and adjusted
gross income limits.) This will reduce
the bite Uncle Sam takes from your
paycheck and investment earnings,
allowing more of the money you earn
the potential to grow.
IRAs and Retirement Accounts
Annual Contributions Limits
Year
401(k) & 401 457 Plan
(b) Plan Limit Limit
IRA Limit
2002
2003
2004
2005
2006
2007
2008
2009
2010
$11,000
$12,000
$13,000
$14,000
$15,000
Indexed for
inflation at
$500
increments
$3,000
$3,000
$3,000
$4,000
$4,000
$4,000
$5,000
Indexed for
inflation at
$500
increments
$11,000
$12,000
$13,000
$14,000
$15,000
Indexed for
inflation at
$500
increments
401(k), 401
(b) &457
Catch-Up
$1,000
$2,000
$3,000
$4,000
$5,000
Indexed for
inflation at
$500
increments
IRA CatchUp
$500
$500
$500
$500
$1,000
$1,000 in
later years
not indexed
for inflation